What’s Ahead for Natural Gas?

By Amy Harder – energy and environment reporter, National Journal

What are the challenges and opportunities ahead for natural gas?

The recent revolution involving shale natural gas in the United States has sparked debate on a range of issues: the environmental and safety concerns surrounding hydraulic fracturing–the controversial extraction method that’s critical to accessing shale gas; how gas should be used within the country; and whether gas should be exported to countries where prices are high compared to domestic prices, which are at record lows.

Recent developments on these issues underscore the importance of the natural-gas industry. More and more states are enacting laws that require companies to disclose the ingredients and concentrations of the fluids used in hydraulic fracturing. The Energy Department is already approving the first natural-gas exports, and several other applications are pending before it. Meanwhile, legislation in Congress would provide tax incentives for natural-gas-powered trucks, and Environmental Protection Agency clean-air rules are encouraging more utilities to shift from coal-fired power plants to natural gas, which burns cleaner than coal.

How should President Obama and Congress handle these disparate issues in the natural-gas industry? Should Congress enact federal legislation requiring disclosure of fracking fluids? Should the United States export natural gas to capitalize on the shale gas revolution and high prices abroad? What role, if any, should the U.S. government play in regulating natural-gas exports?

January 17, 2012 6:29 AM

The Full Story on Natural Gas Exports

By Charles Ebinger

Director of the Energy Security Initiative at the Brookings Institution

On December 4, Congressman Edward Markey of Massachusetts wrote a letter to Energy Secretary Steven Chu questioning the wisdom of exporting large quantities of U.S. natural gas. His concerns were wide-ranging and included the potential price impacts of exports and the residual impact of higher gas prices on electricity generation and manufacturing, the potential for more volatile natural gas prices, and the environmental impact of raising the cost of gas, which he characterized as a “bridge” fuel from coal to renewable energy.

The question of exporting energy resources, whether crude or refined, from the United States is politically sensitive. Like Congressmen Markey, many consumers argue that exporting a resource or product that can be consumed domestically unnecessarily raises prices and increases price volatility. Manufacturers maintain that sending a vital feedstock overseas rather than retaining it domestically is the equivalent of directly exporting U.S. jobs: a charge that has particular resonance in the current climate of high unemployment.

The reality is far more complex. The Energy Security Initiative at Brookings this week released an interim report examining the feasibility of large-scale U.S. natural gas exports. The report shows that there are a range of factors – political, economic, and technical – that will have an impact on the feasibility of natural gas exports. Being an interim report, it has not yet come to any conclusions on the merits of natural gas exports. But that is precisely the point: the issue is too nuanced for a brief analysis. The impacts of exports on domestic gas prices, industry and manufacturing, and gas-price volatility outlined by Congressman Markey and others require more examination.

The charge that exports will result in a spike in prices is likely to be an exaggeration. A report often cited by opponents of natural gas exports, compiled by Navigant Consulting, states that exporting 2 bcf/day of gas would result in a $0.35 (11 percent) increase in natural gas prices by 2015. However, the model is based on a static supply curve, which means that it does not incorporate increased investment in production as a result of higher natural gas prices, and therefore exaggerates the domestic price response. Navigant itself acknowledges in its report that it views the price outcomes modeled in its analysis as “establishing the upper range of impacts that exports […] might have on natural gas prices.” Other consultancies have published reports on the quantitative impacts of U.S. natural gas exports using dynamic supply curves, in which investment in production increases with higher prices. These found less dramatic increases in natural gas prices. Deloitte, a consultancy, found that by 2035, exporting 6 bcf/day will result in, on average, a $0.12 (1.7 percent) increase in natural gas prices. ICF International, another consultancy, found that exports of 6 bcf/day would result in a $0.64 (11 percent) increase in price by 2035.

Congressman Markey points to the oil market as a cautionary tale, saying that the U.S. was once a major oil exporter, but now finds itself as the world’s largest importer. This is a misleading comparison: unlike the global oil market, which converges around a single price, the natural gas market is still very segmented, with regional gas prices dependent on a range of factors including pipeline and storage availability, and contract structure. Unlike oil, the export of liquefied natural gas (LNG), is limited by liquefaction capacity, raising the economic and transaction costs of exports and giving domestic customers a buffer against direct competition with international consumers.

It is also important to note that any increase in natural gas prices as a result of exports is likely to vary significantly across the country. As in the international market, domestic natural gas prices vary by location, often due to the proximity to natural gas resources. According to the Deloitte study, New England, which traditionally has some of the highest natural gas prices in the country, will likely see only a minimal increase in response because of its proximity to the Marcellus Shale with its giant reserves of unconventional gas.

The uncertainty surrounding the pricing implications of exports also applies to the potential impact on industrial production. The American Chemistry Council, a trade association that represents many of the U.S.’s largest industrial companies and manufacturers, is inconclusive on the impact of gas exports simply acknowledging that “the economic effects arising from the development of shale gas for … possible exports could be examined.” If price-impact projections of exports noted above are accurate, U.S. industry and manufacturers will likely remain competitive with foreign competitors, many of which depend on higher-cost oil as an industrial feedstock. Moreover, exports of dry gas would have minimal impact on the availability of natural gas liquids, such as ethane, which are the principal components of a number of manufactured goods.

The final argument made by many opponents to natural gas exports contends that exporting natural gas will result in greater volatility in the domestic natural gas market. The merits of this argument are unclear. There has been little quantitative analysis of the issue. In an article last year, Michael Levi, an energy expert at the Council on Foreign Relations, suggested that increased exports could lead to an increase in domestic price volatility. Dr Levi suggested that an international price shock could provide an opportunity for exporters to export natural gas at the expense of domestic consumers; however, this argument ignores the fact that export capacity is, and will likely continue to be, capped. Of the country’s potential total export capacity, only a portion of it will be available for spot market consumption (with the rest being locked into long-term contracts), minimizing the impact on domestic prices. (In fairness to Dr. Levi, he also concluded that the impact on volatility is uncertain.) Opponents of natural gas exports should also consider not only the domestic price but also the price of imported goods from natural gas. If manufacturers in Asia or Europe are paying less for energy and electricity to produce U.S.-bound goods, the benefits accrue to the U.S. consumer.

The debate on the prospect of natural gas exports from the United States will only become louder this year. In addition to Cheniere Energy’s export facility in Louisiana, a number of other companies have received preliminary approval from the Department of Energy to export gas to free-trade agreement countries (Cheniere is currently the only company allowed to export gas to non-free-trade-agreement countries). As the debate continues, the full range of factors needs to be considered; too simplistic an analysis may lead to decisions based on politics rather than economics, and that end up being costly to U.S. consumers in the long-run.

January 17, 2012 6:28 AM

Natural Gas-Powered Electricity Critical

By Gregory C. Staple

Over the next few years, we think that the growth of natural gas for electricity generation is likely to be especially notable, producing large economic and health benefits for the country. In this area, market and government policies seem to be complementing one another.

On the market side, thanks to an abundant new domestic supplies from shale gas reserves, North American gas prices are providing a historic opportunity to replace an aging, coal-dependent electric fleet with affordable and flexible natural gas units.

On the government side, legacy coal plants face new and proposed environmental regulations for air as well as water emissions, with the EPA’s recent Mercury and Air Toxics Standards (MATS) and Cross State Air Pollution Rule (CSAPR) having been finalized in 2011. These environmental rules along with additional proposals could cost some coal-fired power plants $2,000 per kilowatt (KW) to comply. But why spend $2,000/KW on an aging unit when a new natural gas combined-cycle can be built for $1,000/KW?
Capital costs aside, natural gas combined cycles are already more efficient in converting fuel to electricity (50% efficiency vs. 30%) and cheaper to operate than many coal units. Based on a recent natural gas spot price of approximately $3.00/MMBTU, a combined cycle plant can produce electricity for about $22 Megawatt Hour (Mwh). An aging coal plant with a delivered coal cost of $90/ton produces electricity at almost $40/Mwh. The gap becomes even greater when you add the costs for emissions allowances (SO2, NOx), and operations and maintenance. With significant excess capacity available at existing gas-fired power plants, in 2012 generators, grid operators and public utility commissions now have the ability to lock in today’s low fuel prices and phase out the most uneconomic coal-fired plants.

An expansion of gas-fired power plants, which can cycle output up and down more quickly and efficiently than legacy coal (or nuclear) plants, will help accommodate the integration of intermittent renewable power sources, such as solar and wind. Flexible gas-fired units can also accommodate greater use of demand-side resources (eg, price sensitive electricity consumption) underpinned by smart grid investments.

In short, thanks to the remarkable new production we have seen from America’s shale energy plays, gas-fired power is fast becoming the lowest cost and cleanest way to generate electricity in the U.S. And it will help the country more rapidly transition its power sector to a sustainable lower carbon future.

January 17, 2012 6:25 AM

Natural Gas: The Winning Ticket in 2012

By Don Santa

President, Interstate Natural Gas Association of America

In making decisions on natural gas issues in 2012, it is important that the president and Congress keep in mind the strategic importance of natural gas to America’s energy future.

The American natural gas resource base is far greater than thought even a few years ago. Development of this resource base already is enhancing the nation’s energy security and improving air quality. Abundant natural gas is fueling America’s economic recovery, supporting industrial expansion, creating American jobs, generating tax and other revenue for the local, state and federal government and benefiting homeowners, businesses and other consumers of natural gas.

We, as an industry, understand natural gas’ importance to our nation’s future, and we are committed to its safe development and transportation. An open public dialogue and stakeholder engagement is vital to securing broad-based support for natural gas supply and infrastructure development, as are state, local and federal policies that balance appropriately the need for increased natural gas supply with concerns over the environment and other impacts.

We hope that President Obama and Congress continue to support the use of natural gas by letting markets, and not mandates, dictate the best use of our nation’s diverse energy resources. Some fear the shale gas revolution will lead to rampant natural gas exports and higher U.S. natural gas prices. Multiple experts, however, point to this as an unwarranted overreaction. The LNG export market is likely to remain modest because the high capital costs to develop LNG export facilities and related infrastructure plus the expense to liquefy and transport natural gas in ocean-going tankers will constrain the volume of LNG exports.

Still, at any level, LNG exports could benefit the nation. At a time when the U.S. has been importing increasing amounts of goods and materials from abroad, LNG exports provide an opportunity to help whittle away the U.S.’s huge trade deficit. LNG exports also would be consistent with President Obama’s initiative announced in December 2010 to promote exports of clean energy.

America’s natural gas resource base is enormous. A National Petroleum Council report released in autumn 2011 showed that even if natural gas demand grew to the highest potential levels – which would include vehicle conversions to natural gas, exports to Mexico and LNG exports on top of dynamic gas growth in the power-generation and industrial sectors – supply would be plentiful to meet demand. Having a dynamic and diverse market gives producers the confidence they need to invest. And that investment in safe and prudent domestic natural gas development, with all the benefits it will provide on economic, energy security and air quality fronts, is good news for America.

January 17, 2012 6:24 AM

Uniting for Jobs & the Environment

By Tom Amontree

Executive Vice President, America’s Natural Gas Alliance

Last week, the White House largely answered this question by releasing a briefing paper highlighting the significant benefits to our economy from responsible natural gas production. Among those benefits are lower consumer costs, reduced air emissions and more American jobs.

A recent IHS Global Insight study found that by 2015, shale gas alone will support nearly 870,000 American jobs, and by 2035, this number will grow to 1.6 million. Shale gas will also generate more than $940 billion in federal, state and local tax and royalty revenues over the next 25 years. What’s more, thanks to lower natural gas prices, U.S. households are projected to save an average of $926 annually in disposable income over the next three years. By 2035, these savings are expected to increase to more than $2,000 per household.

In the White House briefing paper, the Administration attributed much of the rebound in U.S. manufacturing to the boom in domestic natural gas production, saying lower prices thanks to new production technologies have led to cheaper industrial inputs and indirect employment in related industries. Translation? More competitive U.S. workers and companies.

I do believe that our nation should make far greater use of this homegrown energy source—right here in America. For the environment, natural gas is a cleaner source of energy than other widely-used fuels. With greater use of this domestic energy, America can advance its economic, energy and environmental interests together. Used for power generation, natural gas emits no mercury and virtually no sulfur dioxide or particulate matter into the air. And there is enough natural gas in America to fuel our nation’s energy needs for generations to come.

The natural gas community shares the Obama administration’s commitment to ensuring natural gas continues to be produced responsibly. And significant oversight is in place today with state regulators taking the lead. Our nation does not have to choose between economic growth and environmental stewardship. Thanks in no small part to our nation’s vast abundance of natural gas, we can indeed have both.

January 17, 2012 6:22 AM

Exporting Gas: Why the Rush?

By Mark Muro

Fellow and Director of Policy, Metropolitan Policy Program at Brookings

The astonishing boom in American shale gas production continues to rock the energy world. Perceptions of fuel abundance and scarcity, projection of the U.S. energy mix, forecasts of the price environment for renewables—all of these are now in flux thanks to recent breakthroughs in gas production.

And yet, for all of these repercussions of the gas glut, none is quite so dizzying as the sudden recent pivot of discussion from anxiety about natural gas imports to debates about whether to export huge quantities of the fuel—something that requires approvals from the Department of Energy.

On this topic, a few isolated voices—like the Michael Levi of the Council on Foreign Relations—have raised questions about the standard argument that the U.S. should clearly export what is suddenly cheap here to European and Asian countries where prices are much higher. Leaving aside basic gas-drilling safety issues, he wonders if exporting will lead to greater price volatility. However, for the most part commentators—such as Charles Blanchard of Bloomberg New Energy Finance—have brushed aside uncertainties and tended to embrace the conventional free trader’s view that prices on the global energy market will decide things and that everybody gains from free exports and imports.

All of which is in theory sensible. However, I want to add two considerations to the discussion—one about uncertainty and the other about America’s industrial interests. The point comes in the spirit of Rep. Ed Markey’s recent letter to Energy Sec. Steve Chu. In that letter, Markey asks Chu 11 basic questions about the possible implementation and impacts of natural gas exportation, ranging from queries about the procedures for issuing LNG terminal permits to questions about the price impacts of exporting. So basic are Markey’s questions (which leave aside broader unresolved questions about the environmental safety of shale gas extraction, governments’ future regulatory stances, and even about the actual yield of nat gas wells) that they underscore how early it is in the latest gas boom and how little is really known about the “shale gale.” On this front, the excellent and generally favorable assessment of the prospects of LNG exports recently released by my Brookings colleague Charles Ebinger and his team is noteworthy for how frequently it acknowledges major uncertainties surrounding such basic issues as the availability of the resource, its production sustainability, its future regulation, pipeline and storage capacity, equipment availability, and future market dynamics. The bottom line, in my view, is that proponents of exporting are rushing forward in an atmosphere of major uncertainty. And I think that’s not wise.

But beyond that, I would like to add another perspective that flows from our emphasis at the Metropolitan Policy Program on the long-run need to restructure the U.S. economy and move toward higher-value production and export activities.

Along these lines, I would place the overall wellbeing of higher-order U.S. industrial production at the top of my priorities list, and consider the benefits of cheap natural gas to the growth and health of the U.S. economy. To be sure, having companies like Cheniere Energy liquefy and export natural gas to cash in on the spread between low U.S. prices and higher European and Asian ones would allow U.S. producers to reap a bonanza and help cut into the U.S. trade deficit. However, it bears recalling that large-scale exports of natural gas could tighten domestic supply and raise prices.

Higher prices for consumers, as Michael Levi notes, represent one possible economic drag on the nation’s recovery associated with exporting gas. But so do higher costs to U.S. industrial producers. Today, nearly 45 percent of U.S. natural gas consumption flows to industrial concerns that use it to produce chemicals, fertilizers, metal, plastics, paper, refinery products, glass, and food products. In that fashion, cheap natural gas is a critical input to numerous production and export industries in America. And so maintaining low gas prices should stand now as a major strategic and competitive interest of the U.S. Already the Department of Commerce has observed that “a boom in natural has production has supported manufacturing” by helping to reduce energy costs for industrial producers. For its part, PricewaterhouseCoopers last month deemed shale gas a driver of a “renaissance in U.S. manufacturing.” So what does this look like on the ground? To pick just a few examples, Bayer MaterialScience is exploring opening an ethane cracker in West Virginia to process the shale gas from the Marcellus formation while Dow Chemical and Shell Chemical have announced plans to expand and open, respectively, crackers on the Gulf Coast. Similarly, Nucor is investing $750 million in an iron plant that would depend on a low-cost gas supply agreement. More broadly, the American Chemistry Society recently noted the potential for sizable job and output benefits in the chemical industry associated with the shale gas revolution. The trade association projects that a 25 percent increase in the supply of ethane in the U.S. could result in 17,000 new direct jobs in the chemical industry. All of which suggests that cheap natural gas represents an important point of competitive advantage for desirable, higher-value industries and the promotion of investment in U.S. industry.

My tentative conclusion: It would be premature for DOE to conclude that the U.S. now has so much gas that it can afford to export it overseas without risking domestic price dislocations. At least for now, gas should be husbanded as a low-cost input to industrial production as well as held as a high-potential, cleaner substitute fuel for use in the electric power sector to displace coal in generating plants and in the transportation sector to displace oil. No, this is not to say the nation should bar natural has exports either now or later, but it is to say that there’s a lot that needs thinking through before a precipitous decision is made to lock in major exportation facilities and contracts. In short, for the present moment gas should be exported not in its raw form but only as a low-cost input to higher-value production and job creation by American companies.

Such are the sort of considerations that must increasingly inform the energy decisions of a nation that needs to—all at once—reduce carbon emissions and more actively attend to the emergence of a higher-value production economy.

January 17, 2012 6:20 AM

EPA Could Thwart Gas Supplies

By David Holt

President, Consumer Energy Alliance

It’s ironic that less than a decade ago, our country was so concerned about dwindling natural gas supplies that we built new LNG import terminals to secure a supply from overseas. Fast forward to today when newly discovered shale formations around the country, and new technology, are giving us the chance to access an amazing domestic supply of natural gas, and are simultaneously presenting us with a unique opportunity to revitalize our domestic energy industry, and stimulate growth for decades to come. It’s ironic because as this question outlines, we can’t seem to completely embrace the opportunity.

Despite the positive outlook for natural gas in the United States (see below), the federal government is moving to hinder the development of this vital resource through unreasonable regulations and red tape. The EPA and other federal agencies are proposing and exploring new regulations that could thwart gas development projects and needed infrastructure through stringent licensing requirements and other barriers. These steps will severely limit how America can capitalize on this valuable resource.

Even the White House, which has presented conflicting views on shale and natural gas, released a report last Wednesday acknowledging that our natural gas reserves are key to revitalizing our domestic manufacturing sector. Indeed, these reserves have the potential to create a manufacturing boom that can have a tremendous impact on the US economy. The natural gas industry supports more than 2.8 million U.S. jobs TODAY and contributes $385 billion annually to the national economy. And unlike many sectors, these jobs actually represent a 17% growth over the past several years.

When we make the most of our natural resources, we can make a meaningful difference in the amount consumers and businesses pay for energy. At a time when the is economy struggling and world oil is turning political again, we need all the domestic energy we can get. This story from the Associated Press highlights how the boomin domestic natural gas has been a blessing to homeowners who use it for heat and appliances. And we need to take advantage of it before others do. International investors are jumping at the chance to invest in our natural gas reserves. The U.S. shale could revolutionize domestic energy production, revitalize our economy, and shield us from the geopolitical volatility beyond our borders. This could truly be a game changer.

January 17, 2012 6:18 AM

Zero Emissions from Natural Gas?

By Armond Cohen

Executive Director, Clean Air Task Force

With the global explosion of unconventional gas production, reports of the death of the fossil fuel economy are, to paraphrase Mark Twain, greatly exaggerated. Gas may not stay at its current extraordinarily low price, but the market landscape seems to be altered for quite some time.

The explosion of low-cost shale gas reserves is a two-edged climate sword. Generating electricity with gas is 30 to 50 percent less carbon-intensive than coal when leaks and releases of methane, the main component of natural gas, are accounted for. (For other uses like vehicle fuel, we haven’t seen any evidence that gas is better than other fossil fuels, and if vehicles leak even a small amount, natural gas could be worse than gasoline). But even for electricity, gas is still a high-carbon fuel: replacing all coal-fired generation with gas would get us only part of the way to the 80 percent CO2 reduction needed by mid-century. Moreover, new gas plants are more likely to displace new zero-carbon generation sources than to displace existing cheap coal plants. Carbon dioxide emitted to the atmosphere stays there, causing warming, for many centuries. By some estimates, the amount of CO2 already emitted has committed the world to warming in excess of 2 degrees Celsius, which is well outside human experience; to hold the increase to 3-4 degrees might well require zeroing out carbon emissions by mid-century.

It would be very nice if we could supply most energy demand with wind, solar and energy efficiency. But there are a lot of real reasons to doubt that these technologies can achieve the necessary scope and scale to displace fossil fuels in the next thirty years. Serious challenges lie ahead for renewables, notably their low output, affordable energy storage, large land area requirements, and the need for back them up with fossil power such as gas when they are naturally not available. Biofuels in use and development today won’t do it because the large amount of new energy crops they require cause substantial carbon emissions (direct and indirect) and would cause other large-scale environmental problems. And, while more energy efficiency is important, it is notable that twenty-five years of the world’s most aggressive electric energy efficiency programs, in California, have reduced electric demand by only around 15 percent from business as usual – not enough to displace the 100% electric demand growth we expect to see in the world over the next two decades.

So, gas is less a “bridge to zero-carbon energy,” than it is a very long highway – gas will be used for some time. What must be done to ensure it makes more than a modest contribution to climate protection?

First, we must ensure that gas production itself does not get in the way. Gas that leaks and is released from US gas systems warms the climate about 40% as much as America’s coal plants, because methane, pound for pound, warms the climate seventy times more than CO2 (considering the warming over twenty years). Addressing this problem is not rocket science – it’s a matter of dollars and engineering. The EPA is currently considering rules that could have the co-benefit of reducing this leakage by about a quarter, but we can cost-effectively – certainly more than half – by focusing on methane directly.

Second, as a recent report of the National Petroleum Council, a petroleum industry-led organization, noted:

[I]f very deep reductions in GHG emissions are desired over the long run, fossil fuels, including natural gas, could play only a limited role in providing energy unless there is a means to capture and sequester the CO2 emissions from burning fossil fuels.

Fortunately, there is. CO2 capture technology is available now for natural gas power plants, geologic carbon sequestration is available in many areas of the country, and geologic sequestration through enhanced oil recovery has been in use for decades. Perhaps the single most important message EPA could send to the clean energy market when it sets CO2 performance standards for gas plants, would be to indicate that CCS will eventually be required on existing natural gas power plants (as well as on coal plants). Because gas is the cheapest new power option, and typically undercuts cleaner forms of energy on price, requiring CCS on gas in the next decades could level the environmental and economic playing field between zero- and near zero-emitting sources of electricity, spurring substantial incremental investment in all forms of clean energy going forward. The sooner we get started, the better.

January 17, 2012 6:16 AM

Government Could Hinder Gas Golden Age

By William O’Keefe

CEO, George C. Marshall Institute

It may be a stretch, but not a great one, to say that we are entering the golden age of natural gas. The combined processes of horizontal drilling and hydraulic fracturing have unlocked incredible quantities of natural gas, enough to sustain the U.S. for more than 100 years of consumption. This kind of abundance of a low cost, cleaner fuel offers great benefits to our economic growth, public welfare, and national security.

Yet, government interference could jeopardize these benefits. Politicians trying to “fix” issues they don’t understand or simply appease radical factions of their base may represents the biggest challenge ahead for natural gas.

The overreact crowd cites an isolated number of incidents involving well construction and waste water disposal (problems which can arise from drilling in general, not hydraulic fracturing itself) in order to push for all sorts of regulatory and legislative intervention into the development of shale resources—oil and gas trapped far underground in an incredibly hard geologic formation known as “shale” rock. In fact, opponents have yet to produce a case of water contamination caused by fracking. That has, however, not stopped them from propagating claims to that effect.

Late political satirist H. L. Mencken once observed:

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.

Given that reality, sorting out hobgoblins from real problems in shale development is an essential first step in effectively capturing the benefits of the natural gas boom.

Key stakeholders have already begun contributing to that process. The industry is working with states to reduce risks and provide useful information about the composition of fracking fluids. Federal policymakers should allow these collaborative approaches to mature before Congress or the President starts seriously considering national intervention. It would be surprising if the federal government didn’t already have sufficient authority to obtain information necessary to ensure public health and safety.

Market forces, technology, facts, and the best practices of first rate companies will lead to drilling, process, and disposal practice improvements that allow the nation to realize the full benefits of this natural gas revolution. Overreaction will have the opposite effect in the near term. The abundance of natural gas reserves makes it inevitable that they will be used. The issue is whether they will be used smartly?

It is well recognized that there are a large number of older coal fired power generation units that should be replaced. EPA’s preferred approach is command and control—the agency’s utility MACT rule, for example. That will work in shuttering older power plants but at an enormous cost and risk of electricity shortages. It would be better to structure economic incentives to hasten the transition of these coal fired units to natural gas ones. Accelerated depreciation, which has a lot of merits for encouraging capital investments, is one such incentive.

Power generated with natural gas reduces air pollutants and has fewer carbon dioxide emissions, both of which meet objectives pushed by the environmental community. In addition, natural gas—transported through pipelines—would reduce the truck, barge, and rail traffic that moves coal.

As is the case in an integrated economy, increased abundance and affordability of natural gas will trigger an increase in its industrial uses, which range from fertilizers to chemical products. That means an increase in capital investment and new U.S. jobs across the economy. Moreover, our abundance can help other nations to meet their energy needs through exports of U.S produced natural gas. A natural gas export industry would help our balance of trade while creating jobs in construction, shipping, and operations.

Some proponents of natural gas are pushing for incentives to use natural gas as a substitute for gasoline and diesel. The government should tread softly in going down this alternative fuel highway. There are obvious benefits in using natural gas for centrally fueled fleets like buses and delivery trucks. However, the benefits for personal transportation are less clear and at this time are mostly hype by people who will benefit by any actions that increase the demand, and hence the price, for natural gas.

Incentives to encourage the purchase of natural gas vehicles are just another subsidy that takes money from one group of taxpayers and gives it to another group. The range of natural gas vehicles is far less than that of gasoline vehicles because of natural gas’ lower energy density. Natural gas vehicles require larger tanks as a result in less trunk space. Until it becomes clear that natural gas vehicles are commercially viable, the needed infrastructure will be slow in developing. That will lead proposals by proponents for all sorts of credits and guarantees to develop it. We don’t need a new class of Solyndra projects for natural gas. Market forces developed our gasoline infrastructure. And the same will hold true for natural gas when the time is appropriate.

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